What Are the Odds the Fed Hikes Interest Rates to 8 Percent?

I ask the question because the number came up in a recent JP Morgan publication.

8 Percent “Prediction” or “Possibility”?

This headline by TFTC caught my eye: JP Morgan Predicts Crushing 8% Interest Rate Spike

JP Morgan forecasts interest rates rising to 8%, potentially triggering a recession and banking crisis similar to past financial downturns.

JP Morgan, the largest bank in the United States, has released a 61-page shareholder letter predicting an increase in interest rates to 8%—a figure that hasn’t been seen since the era of the late eighties. This dire forecast comes on the heels of staggering stagflation numbers and warns of potentially catastrophic consequences for the economy and the banking system.

The last time the country grappled with 8% interest rates, it triggered the recession during the first Bush administration, resulting in mortgage rates soaring to 10% and ten-year bond yields hitting 9%. The implications of such rates in today’s climate could be devastating. An analysis suggests that the housing market, already struggling, would face further decline, with a 7% rate hike serving as a crippling blow to prospective young American homeowners, increasing their purchasing costs by an estimated 50%.

No Such Prediction

That sounds dire, and it surely would be. However, Jamie Dimon, CEO of JPMorgan, made no such prediction in its 2023 Annual Shareholder Letter (link repeated from above). Here is the pertinent snip:

Equity values, by most measures, are at the high end of the valuation range, and credit spreads are extremely tight. These markets seem to be pricing in at a 70% to 80% chance of a soft landing — modest growth along with declining inflation and interest rates. I believe the odds are a lot lower than that. In the meantime, there seems to be an enormous focus, too much so, on monthly inflation data and modest changes to interest rates. But the die may be cast — interest rates looking out a year or two may be predetermined by all of the factors I mentioned above. Small changes in interest rates today may have less impact on inflation in the future than many people believe.

Therefore, we are prepared for a very broad range of interest rates, from 2% to 8% or even more, with equally wide-ranging economic outcomes — from strong economic growth with moderate inflation (in this case, higher interest rates would result from higher demand for capital) to a recession with inflation; i.e., stagflation. Economically, the worst-case scenario would be stagflation, which would not only come with higher interest rates but also with higher credit losses, lower business volumes and more difficult markets. Under these many different scenarios, our company would continue to perform at least okay. Importantly, being prepared means we can continue to help our clients no matter what the future portends.

JP Morgan says it is prepared for a range of 2% to 8%. It is not predicting 8.0%. So the TFTC headline is observably false.

I fail to see how one can be prepared for either 8.0 percent or 2.0 percent other than by adopting to changing environments. So what we have above is a self-serving statement by Dimon.

Regardless, 8.0 percent is not at all out of the question for many simultaneous reasons.

10 Inflationary Concerns

1. US budgets are out of control.
2. Global wage arbitrage is over.
3. Excessive regulations.
4. Growing power of unions.
5. End of just in time manufacturing.
6. Trade wars no matter who wins in November.
7. AI and the need for more energy
8. Rare earth metals controlled by China
9. Woke policies by states
10. Threat of real wars with Russia of China

The Fed had ability to cut rates at the first sign of trouble for decades due to global wage arbitrage, outsourcing, and just in time manufacturing.

Those are all gone and there are seven additional concerns. There are some deflationary forces in play such as a boomer die off that will releases millions of homes.

But boomer demographics are not all one sided. The inflationary side is increased need for more medical services.

Trade War No Matter Who Wins in November

My big concern, and one hardly on anyone’s radar at the moment is a global trade war. This is barely on page 10 right now. By the end of the year, I expect trade wars to be page 1 news.

Trump has threatened to raise tariffs on China by 60 percent. Neither Trump nor Biden will allow Chinese cars into the US. The EU is making similar threats.

I will expand on this idea in a subsequent post, but if the US and EU are too aggressive in pursuit, China could respond by invading Taiwan or by blocking US access to rare earth minerals needed in phones, computers, military guidance systems, wind turbines, EVs, magnets, and microchips.

I don’t know the odds of 8.0 percent interest rates or of China invading Taiwan, nor does anyone else. So I am not making a prediction. But I am sure a global trade war looms and the consequences will not be good.

Computer Chip Sanctions Fail

On September 4, 2023, I noted US Sanctions Fail Again, China Now Produces Its Own Advanced Computer Chips

Trump and Biden both tried to cut off China’s supply of advanced microchips. The US wanted to knock Huawei out of the 5G market. Now, instead of China using US chips, it is producing its own chips.

China Bans iPhone Use for Government Officials

On September 7, in response to US actions, I asked China Bans iPhone Use for Government Officials, Just a Start?

And about that chip ban …

On February 18, 2024 I discussed How China Gets Around US Sanctions on Semiconductors

The US Threatens to Sanction Companies That Don’t Give a Damn

On April 23, I noted The US Threatens to Sanction Companies That Don’t Give a Damn

The Biden administration claims Chinese companies help Russia rebuild its war machine. Our sanction proposal counter is laughable. China’s counterthreat isn’t.

US actions have not yet posed a serious problem because Russia and China have found ways around them.

But if and when the US ever succeeds in its foolish trade restrictive policy and China gets upset enough, expect major ramifications.

Think back to why Japan attacked the US in WWII for what might happen.